Sarkozy predicts two-speed Europe

Thu, Nov 10, 2011, 00:00

RUADHAN MACCORMAIC

FRANCE:FRENCH PRESIDENT Nicolas Sarkozy has predicted a two-speed Europe will emerge from the debt crisis, with euro zone states moving towards closer integration and the rest making up a looser “confederation”.

The turmoil in financial markets hit France heavily yesterday. The spread, or difference, between its bonds and Germany’s hit a new record, reflecting concerns over its banks’ heavy exposure to Italian debt. Earlier, the Bank of France projected the economy would stop growing in the final three months of the year.

Throughout the debt crisis, France has pushed for closer co-operation between single currency states, seeing the smaller 17-state club as a more cohesive forum where its own influence is amplified. In a speech in Strasbourg, Mr Sarkozy set out a vision of a European Union where these shifts went further.

“There are 27 of us. Clearly, down the line we will have to include the Balkans. There will be 32, 33, 34 of us. No one thinks that federalism, total integration, will be possible with 33, 34 or 35 states,” he said.

“Clearly, there will be a two-speed Europe: one speed that moves towards more integration in the euro zone and one speed for a confederation within the European Union.” Mr Sarkozy did not say whether he envisaged the “core” single currency group becoming smaller than 17.

While dealing with the Greek crisis in Cannes last week, he and German chancellor Angela Merkel spoke for the first time of allowing a euro member to leave the currency group, while last Tuesday the French president said it had been a mistake to allow Greece to join the euro in the first place.

The 17-member euro area, by excluding large states such as the UK and Poland, gives the Franco-German axis more influence. Minister for Finance Michael Noonan indicated last week he wanted to see the 27 EU states running the system rather than the 17 currency partners dominated by the largest states.

Mr Sarkozy has argued the debt crisis must lead to more integration and claimed credit last month for agreement among euro zone leaders to move towards closer economic governance in the bloc.

“Our ambition is to seize the Greek crisis to make a qualitative jump in the construction of a system of economic governance of the euro zone,” Mr Sarkozy said. “We can’t keep having a currency disconnected from economic policy.”

He has described the relatively recent practice of meetings between heads of state and government from euro zone members as the de facto “economic government” of the zone.

Exclusion from euro zone decision-making is resented by non-euro member states such as Poland and Sweden, while the idea of a core euro zone would likely be opposed by countries such as the Netherlands as well.

“That is why, while the United Kingdom fully supports deeper fiscal integration within the euro zone to support monetary union, we would not wish it to become a club within a club. To retreat from each other now would be to leave ourselves isolated in extremely tempestuous times.”

The French government this week unveiled its second major austerity package in three months as it tries to safeguard its previous triple-A credit rating and insulate itself from the euro zone turmoil.

Its hopes of seeing economic growth spur France’s short-term recovery received a setback yesterday, however, when the Bank of France said the economy would stand still in the final quarter of the year.

That bad news was compounded by a rise in France’s cost of borrowing. A combination of rising French government bond yields and a fall in their German equivalents saw the spread between the two countries’ bonds hit a record of 146 basis points.

France’s banks have the biggest overall exposure to Italy, with the Bank for International Settlements estimating that they held $416.4 billion (€307.4 billion) of Italian debt at the end of June.